The Australia Tax Part I: A Debate Worth Having?

"Australia Tax" is a phrase used frequently to describe the price gulf that exists between identical products sold in Australia compared to other countries, particularly USA, Canada, UK and the Eurozone. I am no stranger to products being priced through the stratosphere, but there is something rather different about the Australian price differential: it is consistent, and exists across practically every segment of retail. The price premium we pay in Australia for identical products over UK, USA and the Eurozone is large enough make one think.

In this series of articles, I will try and make sense of the "Australia Tax". Luxury brands are by no means the only offenders, but they do seem to have the widest gaps between Australian and overseas pricing. And to compound issues, luxury brands often present the consumer with the problem of difficult to circumvent price boundaries.

Some companies are particularly bad offenders when it comes to price discrimination (Hello Estee Lauder Group, YvesSaintLaurent, Giorgio Armani, Elizabeth Arden, Dior and Chanel). Granted, the Australian Dollar is a volatile currency and product prices are set to take into account the worst-case scenario, but in this debate who has the right of way,the customer or the seller/distributor? I will take a look in this series at the different points of view around the issue, both from the customers' and retailers' perspectives.

I will use data from factual external sources to support arguments from both sides in this series; I intend to cover the different facets of this issue such as exchange rates, taxes, price parity etc. There's a few points to consider, and I will try and cover as many bases as possible without getting overly technical.

In this first part of the series, I take a holistic look at the issue, and consider if this debate is something worthwhile in the first place. As you will find out while reading, it very well seems to be. However, the deeper I looked into this issue, the more I realised that there is always more than one side to a story.

From the customers' perspective, the argument centres on one issue: majority of high-end brands simply have too much of a price premium in Australia. And before I get apologists throwing nonsensical excuses at me like the Chanel salespeople at one well-known department store, that "luxury brands are inherently pricey" or "we use high quality ingredients that cost a lot", let me make it clear: I am considering prices for identical products across different countries, and these excuses go right out the window for the same reason. High material costs are possible, but I don't believe your raw materials suddenly double in price for Australia-bound products, and neither does Chanel become the equivalent of Garnier in the USA when selling perfume for less than half of what we pay. 

From the sellers' side, their claims are a combination of factors leading to higher prices: high wages (indeed we have one of the world's highest minimum wages), high rents at desirable locations, high costs of freight owing to relatively small market size and isolated location, and so on. Ultimately, these costs are passed on to the customers, and that manifests as high prices for the customer at the tail end of the chain.

An oft-used complaint from customers is that prices havent moved with exchange rates; using data from OzForex, I had a look at the exchange rates of the Australian Dollar vs the US Dollar over the last 23-odd years (1990 onwards). As it seems, the retailers may have some semblance of an argument, although not strong enough to sway things entirely in their favour.

As a customer, the general idea is simple. If a product can be found cheaper elsewhere, it's a go. Online retail may be cheaper due to whatever reasons as there may be, it's not the customers' concern. If the pricing set by the vendor is seen as too high and is easy enough to bypass, a savvy customer will do it. And therein lies the rub with luxury goods: their limited distribution, and with some brands, the iron-fisted controls over the supply chain (e.g. Chanel) mean it can be incredibly hard to source products from other regions easily.

At the expense of sounding sexist, but the tendency to price-hunt, especially among the female cohort (by a distance the larger of the target audiences for most skincare/fragrance/cosmetic companies) doesn't appear to be as strong as that in males. I am seeking more concrete data to back it up, but anecdotal evidence does point to it in a few places. On a popular Australian forum for skincare and beauty products, a number of members seemed convinced that an online retailer selling products cheaper than Australian street retail was "dodgy", the fact that the prices were on par with USA notwithstanding. And there lies another problem: if the majority of consumers are not aware that a product is overpriced in Australia, why does the seller care to make prices more realistic?

There's also the age-old debate of "charge whatever the customer is willing to pay". It centres on the issue of purchase power. If customers in Australia can afford to pay more than their US counterparts, and are willing to do so, there is no incentive for the seller to price goods lower than what the customer' comfort threshold is. It is also sometimes a trade-off between margins and volume. The USA, for example is a much larger market, and retailers over there can make up for smaller profits on individual products by simply selling more.

And adding to what is now looking like a cocktail, there's manufacturing locations. Many brands have localised manufacturing facilities for certain regions, which can mean some countries get the same product a lot cheaper than others.

As is obvious by now, there's a number of different issues at play, and all have some part in determining what a product scan at the checkout for. In the next part of the series, I will look at exchange rates.